When looking into financial assistance for emergency expenses, there are a number of options to consider. Two of the most common include title loans and personal loans. These two borrowing options vary drastically and tend to have different uses, so breaking down each type can help you determine which is right for your situation.
Secured Vs. Unsecured Loans
Before diving into the ins and outs of title loans and personal loans, it’s important to look at the different types of loans that a borrower has available to them.
In looking at different loan types, there are two primary loan options to consider: secured and unsecured loans. Secured loans require a borrower to offer up some form of collateral to the lender, in return for the loan funds, which acts as an extra layer of security. Unsecured loans, on the other hand, require no collateral and a lender provides the borrower with the loan funds without taking anything in return.
For most cases, secured loans are offered to borrower who are deemed a higher risk or are offered when very few requirements are in place during the application process.
What Is A Title Loan?
A title loan is a short-term loan with a repayment period of only 30 days on average. The amount borrowed with a title loan is typically a very small amount, ranging from a couple hundred to a couple thousand, and usually comes with a higher interest rate due to the shorter repayment period.
Title loans are secured loans that, in most cases, require the borrower to provide the lender with the title to their vehicle in return for the loan. Once the loan has been repaid in full, the lender will return the title of the car to the borrower. However, if a borrower fails to repay the loan then the lender will repossess the vehicle.
Benefits of a Title Loan
• Quick access to cash can be used for emergency expenses
• Very few requirements are demanded when applying for a title loan
• Potential option to roll a current loan into a new loan
Drawbacks of a Title Loan
Your car title is required as collateral, meaning you’re at risk of losing your vehicle
Loan amount is typically only 25-50% of the current value of your vehicle
High interest rates and potential fees
What Is A Personal Loan?
On the other hand, personal loans are a sum of money borrowed, ranging from $1,000-$100,000, that have a set repayment period with consistent monthly payments. These payments include any interest or associated fees, with the total tenor of the loan ranging from two to seven years on average.
In most cases, a personal loan is unsecured and requires no form of collateral on behalf of the borrower. With that said, due to the higher risk, a lender will have stricter requirements for taking out a person loan including a credit check. Personal loans are different than title loans in a number of ways, but the various pros and cons of personal loans may help you determine which is right for you.
Benefits of a Personal Loan
• One lump sum provided up front, typically in a larger amount
• Lower interest rates if you have a better credit score
• No collateral required in most cases
• Set repayment schedule allows for better budgeting
Drawbacks of a Personal Loan
• Increased amount of debt
• Higher payments than credit cards
• Potential long-term credit damage if you miss payments
• Potentially hidden fees
How To Choose Between A Title And Personal Loan
Choosing between a title and personal loan requires evaluating a number of factors. For example, if you’re planning on selling your vehicle in the near future and wondering can you sell a car with a title loan on it, the answer is certainly but it’s complicated. Factors such as the above are important to take into account when choosing between these loan types. Consider the below:
• Consider the amount of money you need by evaluating the purpose of the loan
• Take your current budget into account and see what you can afford for repayments
• Look at the interest rates you would be offered
• See if you would even qualify for a personal loan to begin with
5 Tips For Repaying Your Loan
1. Set a portion of your paycheck aside
When taking out debt, you should always have a plan for how to meet your required payments. The best way to do that is to set a small portion of your paycheck aside for months leading up to taking out the debt.
2. Pay more than the minimum payment
Whether it’s a title loan or personal loan, aim to pay more than just the bare minimum on a monthly basis or with a lump sum payment. If possible, pay off as much debt as possible to reduce the interest you need to pay in the future.
3. Consolidate different debt
If you have different debt from varying lenders, one effective way to start repaying your debt is to consolidate it under one loan. This will reduce the number of interest rates and monthly payments that you have outstanding at a given time.
4. Focus on paying your most expensive loan first
There are two strategies when repaying loans: paying the most expensive first or snowballing and starting with the lowest payment. When dealing with a title loan, paying your largest debt first is the best strategy considering the higher interest rate and short repayment period.
5. Create a budget
Finally, regardless of the type of debt you take out, setting a budget is one of the most important tasks. Work these payments into your budget to be sure you can meet the payment without struggling financially.
Bolster Your Financial Standpoint Today
Taking out debt should never be done lightly and having a repayment plan in place before ever applying for a loan should be a top priority. Evaluate your needs for financial assistance, looking at factors such as the amount you need and the purpose it’s for, to figure out which loan type is right for you.